- Return on investment (ROI) is the dollar value generated divided by the dollar cost
- For cannabis stores and dispensaries, the two main ways to generate dollar value are:
- Make more money by increasing total revenues and growing gross margins
- Spend less money by decreasing inventory cost and minimizing people cost
- It’s also worth factoring in strategic, qualitative value in addition to the tactical, quantitative value of a data toolkit
In a recent post, Best practices for managing cannabis inventory, we wrote about using data tools to make sure you’re stocking the right products in the right quantities at the right time to maximize your profits. In another post, Top 3 data solutions for cannabis businesses, we spoke about the pros and cons of building in house vs. hiring a consultant vs. working with cannabis-specific data software.
In this article, we’re zooming in on cannabis recreational stores and dispensaries and how to quantify a business case for implementing a data toolkit. We will walk through how to think about the return on investment (ROI) for cannabis data tools and share how we built our Data Value Calculator for retail cannabis businesses.
Return on investment (ROI) is calculated as dollar value created divided by the dollar cost
Simply put, ROI calculations answer the question: was this investment worth the cost? If the increase in dollars is equal to or less than what you spent, then the project wasn’t worth the time and effort to implement. If you make more money than you spent, then you are growing your bottom line with intelligent investments.
Any investment in data services should consider the strategic and tactical angles of benefit. For cannabis recreational stores and dispensaries, the most common strategic goals for data solutions are:
- Use your existing data to build or enhance your competitive advantage
- Build barriers to entry by optimizing operations with business data
- Implement controls & best practices across current and future locations
- Develop scalable models for rapid expansion
- Fast, cost-effective pilot projects to validate ROI and ease of use
These strategic goals are typically accomplished with 5 common tactical enhancements with a successful data toolkit:
- Increase revenue
- Increase profit margins
- Decrease inventory cost
- Decrease people cost (in time and energy)
- Improve peace of mind
We’ll walk through each of these 5 elements and highlight how to quantify the impact on your bottom line to develop your data-driven business case for a data toolkit.
Cannabis stores and dispensaries use data to make more money by increasing revenue and margins
On a very basic level, there are 3 key levers that drive revenue at a store:
- Average price per unit sold
- Average units sold per transaction
- Average transactions per day
These metrics are often referred to as Key Performance Indicators (KPIs) because when they increase, the revenue of your store also increases, so these are the metrics to track your store’s performance. Conversely, if one or more of these KPIs goes down (without another KPI increasing to balance out), then the overall revenue for your store will also go down.
A robust data toolkit will help you increase revenue by calculating these KPIs as well as how they are changing over time. Most importantly, an actionable data toolkit will provide drill-down reports that specifically indicate what to focus on in each KPI to make the change you are looking for.
Whether or not revenue increases, another way to make more money is to increase your profit margins. Profit margins are a function of 2 key concepts:
- Average markup percent
- Average discount rate
Assuming all other KPIs are constant, any time you increase markups or decrease markdowns you’ll improve your overall profit margins and, by extension, the money in your bank account.
Similar to increasing revenues, a useful set of data tools will track your margin KPIs, show you how they’re changing over time, and point you to the specific products or categories that need your attention to move the needle. The more your automated reports & dashboards can point you to specific areas for improvements, the more time and energy you can focus on doing what needs to be done (instead of figuring out where to even start).
One way to quantify the value of a data solution is estimate how it’ll help you increase $ / unit, units / transaction, transactions / day, and markup percent while decreasing your discount rate.
Our customers use the Store Margin Dashboard (sample image below) to track their revenue and margin KPIs including change over time. Each of the (i) bubbles clicks through to a drill-down report with more granular insights that underscore specific next steps.
Stores and dispensaries use data to make more money by decreasing inventory and people costs
A typical cannabis retail location will have hundreds to thousands of products (sometimes called SKUs) – that’s a lot of complexity to manage! In our experience, the vast majority of stores are losing money by stocking too many of the wrong products or too many units of the right products. One of the fastest and most effective ways to increase your cash flow is to get more dialed on inventory and buy planning.
Understanding your best sellers and slow movers is a good place to start, but it’s just the bare-bones basics. You’ll also want to consider your pricing matrix, category saturation, days to stockout, and future buying needs. A productive data toolkit will provide all of the reports you need in a simple and intuitive format to order the right products, in the right quantities, at the right time.
And when your data leads the way on buy planning, it can also save a tremendous amount of time, confusion, and frustration for everyone involved in the process. For the teams that are already running some or all of these reports internally, they usually take a lot of time and energy to export the data, manipulate it, consolidate it, and get it in a format that management can use. These are tasks that computers are much faster and better to accomplish than humans, and ultimately these manual data processes detract time and energy from the things that only humans can do (such as implement changes, build relationships, or think about bigger picture strategy and planning).
Moreover, if there is every any disagreement as to outcomes or methods, that erodes trust in the data tools (and the people running them). And for store or inventory managers that are not super technical, having a centralized reporting framework that’s approved my management can create controls and best practices that empower every teammate to perform according to expectation. Getting everyone on the same page and aligned on how to track success can save incredible amounts of headache and heartache at every level of the business.
Another way to quantify the value of a data toolkit is to calculate expected savings on inventory costs as well as people costs (hours times wage or salary).
Putting it all together to create expected cannabis retail data ROI using a Data Value Calculator
To make this ROI calculation easier for cannabis stores and dispensaries, we developed a value calculator that takes into consideration your existing metrics and applies expected improvements. We’ve broken out the gains into 4 categories: revenue growth, margin gain, inventory savings, and labor savings.
We also call out a number of qualitative improvements that are difficult to quantify but still have a meaningful positive impact on the team and your business. These alone are not enough to justify a new data toolkit, but they are the “cherry on top” of all the dollars earned and saved.
If you’d like to see how much money you’re leaving on the table with your current tools and processes, please schedule a free data consultation and we’ll create your custom ROI calculation for your business.
Do you have a clear idea of your current challenges and opportunities? Do you need help calculating your data toolkit ROI? We always love to hear from you on our contact page and are happy to give you an unbiased perspective on who will best serve your needs. If you’d like to chat about your specific business and needs, feel free to schedule a free data consultation.
We firmly believe that a rising tide lifts all boats, and if we can help you (and our data peers) succeed in this rapidly growing market, it is our honor and pleasure to do so.
Still not sure how where to start?
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